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TAMU ACCT 209 - Merchandising Transactions and Inventories
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ACCT 209 1nd Edition Lecture 6 Outline of Last Lecture I. The Accounting CycleII. Closing EntriesIII. Financial StatementsIV. Using the Financial StatementsOutline of Current Lecture V. Types of companiesVI. Inventory systemsVII. Purchasing Inventorya. ExampleVIII. Calculating Costs of goods solda. ExampleIX. Inventory Cost Flow methodsCurrent LectureChapters 5 and 6 - MERCHANDISING TRANSACTIONS AND INVENTORIESMerchandising companies- Purchase goods for resaleEx: Walmart and AmazonService companies- Do somethingEx: Lawn car, dry cleaners, doctorManufacturing companies- Use raw materials and other resources to create new products for sale to customersEx: Dell and AdidasOperating cycle of a merchandising company -Buy Merchandise (Might pay now or later) - > Sell Merchandise -> Collect cash from customerPeriodic vs. Perpetual Inventory SystemsThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Periodic method – inventory account balance is updated and the amount of expense is determined at end of accounting periodUse adjustment process at end of the year to update inventoryPerpetual method – inventory account balance and amount of expense is calculated continuously throughout the accounting periodMore expensive because it requires more extensive record keeping. Also offers better control of supply.(NOTE: This semester students will be responsible for calculations using the periodic system only, but should understand basic differences between two systems.)Purchasing inventory: Initially recorded as an asset: “Inventory” or “Merchandise inventory”Inventory – Recorded at cost incurred to get the asset in the location and condition required for use.This means that the cost includes purchase price, taxes, tariffs, shipping costs, assembly, modified costs, and insurance while in transit. Credit terms – Offered by seller to encourage prompt paymentEx: 2/10, n/30 – Means there is a 2% discount if paid in 10 days and the full amount or “Net amount” is due in 30 days.Freight charges (Transportation in) FOB shipping point – Buyer pays shippingFOB destination – Seller pays shippingFOB – Free on BoardIn general: The party that pays freight has the title to the goods.Example Purchasing inventoryA. Sunshine Furniture Company sells patio furniture. Sunshine recently purchased 10 patio tables from Picnic Manufacturing Company at a cost of $75 per table. Sunshine also paid $50 in shipping costs to have the tables shipped to its store, and another $120 to have the tables assembled.How much should Sunshine record as the cost of the patio tables?(10* 75) + 50 + 120 = 920b. Sunshine purchased the tables on account from Picnic Manufacturing; Sunshine received the invoice from Picnic on March 29. The invoice amount was $750 for merchandise; credit terms noted on the invoice were 1/10, n/30. Picnic Company prepaid the freight charges and added that amount to the invoice.Note: Discount does not apply to freight costsNote: Total invoice: 750 + 50 = 800If Sunshine pays on April 5, what is the amount of the payment?750 – (.01 * 750) + 50 = $792.50If Sunshine pays on April 26, what is the amount of the payment?The total amount : $800c. Assume Picnic Manufacturing shipped the tables from its warehouse in Oregon to Sunshine’s store in Bryan; the terms of the sale indicate that the tables are being shipped FOB shipping point (Oregon). The tables leave Picnic’s warehouse on March 30, and arrive in Bryan on April 3.Should the tables be included in inventory when Sunshine Company prepares its March 31 balance sheet? Why?Yes, the title passes when the party begins to pay shipping. Sunshine pays freight so they own the tables on March 30.Inventory and the matching principle – Inventory is an asset until it is used to generate revenue; that is when sold. Inventory becomes an expense called “Cost of Goods Sold” or “Cost of Sales” when it is sold.Calculating Cost of goods sold Important!!!Beginning inventory+ Net purchases and FreightGoods available for sale- Ending inventory -> Asset on Balance sheetCost of goods sold -> An expense on Income sheetExample problem #2: Income Statement for a merchandising companySES Company has the following account balances as of December 31, X6:Purchase returns and allowances $ 20 Inventory, January 1 200Sales 400Freight - In 50Sales returns and allowances 25Purchase discounts 5Inventory, December 31 190Purchases 150 Sales Discounts 10Selling and administrative costs 45Freight out 10General expenses 12Required: Determine the gross profit and net income of SES Company.Sales (Gross) 400- Sales discounts (10)- Sales returns and allowances (25)Net Sales 365 -> RevenueCost of Goods Sold Beginning Inventory 200- Purchases (Gross) 150- Purchase discounts (5) Net cost of Inventory purchased:- Purchase returns and allowances (20) $175Freight in 50Cost of Goods available for sale 375- Ending Inventory (190)Cost of goods sold 185Gross profit = Net sales – Cost of goods sold = 180Gross Profit 180- Selling and Administration costs (45)- Freight out (10) Operating Expenses- Other expenses (12)Net Income 113INVENTORY COST FLOW METHODSCost of inventory must be allocated between units sold during period (expense) and units left on hand at end of period (asset)Problem: Counting the number of items on hand at the end of the period is easy. Sometimes,though, the same item purchased at different times will have a different cost. So how do we assign a dollar cost to the units left in inventory and a dollar cost to the units sold during the period?Solution: inventory cost flow methods1. Specific ID method – Only used when each item can be uniquely identified2. Weighted average method – Assume all units have the same average costs3. FIFO (First in First out) – Assumes that goods are sold in the same order as purchased4. LIFO (Last in Frist out)– Assumes that goods are sold in the reverse order as purchasedNOTE: The cost flow method chosen does not have to match the company’s physical flow of goods. (Sometimes it can be impossible to


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